Health Insurance Tax Credit

As a result of the Patient Protection and Affordable Care Act (PPACA), most individuals are required to have health insurance or face a monetary penalty. Families can provide or contribute to a policy for their household employees to help meet this mandate and it’s a great benefit to offer. However, the PPACA does not require employers with fewer than 50 employees to offer a health insurance policy. But employers who choose to do so can benefit from a significant tax savings available through the Health Insurance Tax Credit for Small Employers.

Household employees that wish to purchase coverage on their own can do so through the federal health insurance exchange or the exchange in their state. Subsidies (insurance premium tax credits) will become available to U.S. citizens and legal immigrants with income up to 400% of the federal poverty level who purchase coverage in the new health insurance exchanges. The amount of the subsidy will vary based on income levels. We can help you determine the employee premium subsidies available in your situation.

Health Insurance Tax Credit for Small Employers

Small employers (less than 50 employees) who contribute at least 50% to their employee’s health insurance policy are entitled to a tax credit on that expense – provided the employee’s compensation does not exceed $50,000 and the policy is purchased through SHOP (Small Business Health Options Program). So, in addition to being a non-taxable form of compensation (see Non-Taxable Compensation below), health insurance contributions made by an employer have the added benefit of savings from tax credits.

Household employers can receive a credit of up to 50% of their contribution. The total credit is determined by the average annual salary of the employees. At $25,000, the tax credit is 50% of the contribution. For example, if the Johnsons pay their nanny $25,000 and contribute $350 per month to her health insurance policy, their tax credit would be $2,100 ($350 x 12 = $4,200 x .50 = $2,100).

Additional Notes: As the average annual salary increases above $25,000, the tax credit percentage gradually decreases. In addition to the sliding tax credit percentage, each state has created a ceiling for the contribution portion of the formula based on that state’s average premium cost.

If you’d like an estimate of your tax credit – based on your state ceiling and your tax credit percentage – just give us a call.

The information herein is general in nature and may not be applicable to or suitable for your specific circumstances. Accordingly, the information is not intended to be providing legal or tax advice, and should not be relied upon without the advice and guidance of a professional tax or legal advisor.